Just as I was getting all set to get ready to join countless commentators lamenting that no "big fish" has been caught in the housing blowup, a big fish was convicted and now sits in jail awaiting sentencing.
Alas, on closer inspection, the case of Lee Farkas, former chairman of Taylor, Bean & Whitaker Mortgage Corp., doesn't provide the closure we crave—it fails to confirm the media intuition that the housing boom and bust were brought on by the criminality of mortgage CEOs.
Mr. Farkas's sinning appears to have been less instrumental in causing the housing boom than the housing boom was instrumental in concealing his sin. He certainly was no Angelo Mozilo, the mortgage impresario whom many would like to see strung up for the bubble. For one thing, Taylor Bean wasn't heavily involved in subprime—in 2007, more than 90% of its loans were conventional fixed-rate mortgages and 76% were insured by federal agencies. And the two states where the firm was most active, Georgia and Massachusetts, were not ground-zeroes of the housing meltdown.
Further confounding expectations, his company appears somehow to have lost money all through the boom. His case would seem to have more in common with those of Bernie Madoff or WorldCom's Scott Sullivan—or Harry Stoner, the Jack Lemmon character who fiddles the books to keep his garment factory afloat in "Save the Tiger."
That is to say, his case is a story of accounting fraud as old as the hills, which just happened to take place in the mortgage business.
Not that the episode isn't instructive anyway.
One lesson is that it's hard for a chief executive to commit a crime without everyone around him committing it too. Much of Taylor Bean's management has pleaded guilty to participating in Mr. Farkas's skanky seven-year juggling act, which involved kiting checks at Taylor Bean's bank, selling loans that didn't exist, and pledging the same collateral to different lenders.
The scheme wouldn't have been possible, even then, without the active connivance of a top officer at Alabama-based Colonial Bank, who began by covering up $15 million in overdrafts for Mr. Farkas. Within barely a year, she was helping to fill a hole that amounted to $150 million a day.
As her former boss, Colonial's CFO, later testified: "A customer is typically a check on a bank and a bank employee is a check on the customer. If these two are working together, it makes it very difficult to find any issues."
Another facet to ponder is the role of the government housing lenders, especially Freddie Mac.
As prosecutors tell the story, Mr. Farkas resorted to fraud to conceal a cash crunch when Fannie Mae, in 2002, abruptly stopped doing business with the firm. The previous year Fannie had bought $4 billion in mortgages from Taylor Bean. Fannie accounted for 80% of the firm's volume. Mr. Farkas told an industry publication at the time: "Fannie requested that we disconnect our relationship. They never told me why."
That wasn't quite true. Fannie's decision had followed the discovery that Taylor Bean had sold it six loans that Fannie had previously rejected—loans that defaulted without a single payment being made. Several of the loans had been issued in the name of Mr. Farkas himself. Significance? Because Fannie can send such obviously defective loans back to the originator, one possible implication may be that Mr. Farkas was already gaming the mortgage-insurance system for short-term cash even before prosecutors say his main fraud began in 2002.
Fannie's decision to stop doing business with his firm should have been taps for Taylor Bean. Lo, that's when Freddie Mac arrived and, fully apprising itself of the situation, nonetheless decided to step in and take Fannie's place.
Inexplicable in itself, Freddie's rescue does explain why a former Freddie executive, Paul Allen, came to be hired as Taylor Bean's "CEO," even though he worked out of his home in Virginia, near Freddie's headquarters, and not at Taylor Bean's gleaming office in Florida, where Mr. Farkas still reigned supreme and even prohibited his new CEO from seeing all the company's financial data.
Thanks to Freddie, a $15 million fraud was allowed to blossom into a $1.9 billion one. Mr. Farkas even almost succeeded in scamming $553 million out of TARP to conceal the hole he and his fellow conspirators dug for Colonial Bank (it was TARP investigators who finally blew the whistle on his fraud).
So maybe the saga does have a direct bearing on the housing bubble after all. In 2002, Freddie rescued Taylor Bean. In 2003, Freddie succumbed to its own accounting scandal. In 2004, to make amends to Congress, Freddie's new chief vowed to redouble its "affordable housing" mission. In 2008, Freddie collapsed into the hands of the government under the weight of these subprime loans—beating Taylor Bean and Colonial Bank to bankruptcy by nearly 11 months.